A multi-front battle rages against litigation abuse

In fact, the trend of ever-higher jury awards and judgments means that social inflation is more rightly called “litigation abuse,” according to John Shane, Global Head of Casualty Claims at Zurich Insurance. “That’s an important change because it is an uneven playing field and we should not be shy about calling it what it is.”

Shane was part of a panel discussing the issue at Zurich’s Global Risk Management Summit. In the discussion moderated by Penny Seach, Group Chief Underwriting Officer at Zurich Insurance, Shane was joined by Alexis Valençon, Managing Partner at law firm Kennedys in Paris.

Social inflation sounds more like a “law of nature,” Shane said. But when the curtain is pulled back, it is clear that “this is a quite purposeful strategy on the part of plaintiffs’ bars” as well as judges, legislatures, litigation funding firms and others to favor plaintiffs in cases across the U.S.

While just four states – Florida, Texas, California and New York – accounted for 60% of the “nuclear verdicts” of $10 million or more in the U.S. between 2009 and 2022 (Nuclear Verdicts Trends, Causes and Solutions, September 2022, Institute for Legal Reform), large awards are a concern everywhere in the “50-state battle” in the U.S., Shane said. “There is no state in which a claims department gets a case and says, ‘Oh, it’s in this place, fantastic, no problem,” he said.

Europe manages abuse

While the issue is not as severe in the U.K. and Europe, there are concerns that litigation abuse could worsen there.

“There is a global trend to try to change the legal landscape across Europe to make it a more claimant-friendly environment,” said Valençon. Even so, he added, each country has its own legal and judicial system and new acts and directives proposed and coming into force will be implemented differently in various jurisdictions, which could bode well for insurers and their customers.

“Europe will remain a different world from the U.S. This may be good news,” Valençon said.

Plantiffs’ bar has the upper hand

Insurers, brokers and risk managers are tackling the problem head-on in the U.S., according to Shane.

A big problem in America, Shane said, is a well-organized plaintiffs’ bar that shares strategies on how to win cases and boost awards. “As insurers, that is not our natural place,” he added. “We are competitors and we are not sharing defense strategies.”

That doesn’t mean, however, that insurers are powerless in the fight against soaring awards.

While insurers are restrained from sharing competitive information, they can work with brokers, customers and business groups to make their voices heard, particularly with legislators who they hope can help stem the tide of litigation abuse.

Shane points to successes this type of coalition has had, but acknowledges that so far, they are mostly along the lines of “taking terrible bills and making them less terrible.”

In Illinois, for example, legislation was proposed to allow pre-judgment interest at a rate of 12% from the time an incident occurred. The coalition was able to convince legislators to lower the rate to 7% and not allow it to begin accruing until a lawsuit is filed.

“It is a bit of a success,” Shane said, and there are other cases where “we have intervened to make bad legislation more tolerable.”

“The coalition has been working to figure out how we bring the defense bar together,” Shane said. By studying the tactics of the plaintiffs’ bar, it is possible to determine how to counteract them, he added. “A lot is changing in the way we defend cases as a result of the lessons learned by this coalition and internally.”

Growth of litigation funding

In the U.S., there are 44 litigation funding firms with assets under management of $13.5 billion, said Seach, referring to 2022 Litigation Finance Market Report by Westfleet Advisors. “If that’s not scary enough, the largest has reported a 40% compound annual growth rate in assets under management since 2015,” she said.

Litigation funding is less developed in Europe, where court proceedings can be very long and the return on investment is not as attractive as in the U.S., said Valençon. Despite this, according to Seach, third party litigation funders across Europe are growing accounting for around 16% of global Assets Under Management (Litigation Funding from a European perspective, Deminor).

Still, the firms are finding their way to Europe as some countries move to a more claimant-friendly system, Valençon pointed out. The Netherlands is looking to become a hub for European class-actions and litigation funding is developing in international arbitration cases in France where the length of those hearings is limited, he said.

European justice systems operate differently than those in the U.S. in ways that have generally kept awards far smaller, said Valençon. Juries are seated only for serious criminal cases, for example, and except for one exception, punitive damages are not allowed.

Valençon said the European Union’s Collective Redress Directive contains provisions that limit class-action lawsuits. It provides that only authorized entities – usually non-profit organizations – are allowed to bring class-actions. The directive could, however, allow for more cross-border mass litigation because it allows the entities to partner internationally to bring such actions.

“We expect to see some shifts across Europe,” Seach said, “but we don’t expect it to be as structural and disruptive, potentially, as what we see in the US.” The collective redress directive “seems to be well-thought-through in terms of the implementation,” she added.

Valençon said the EU’s impending revision of the Product Liability Directive that aims to bring it in line with risks of the digital age could significantly change the legal landscape with regard to products liability. The revision requires that a defendant disclose technical information related to a product said to have caused harm, a type of discovery not currently allowed in most of Europe. Failure to produce the information would create a presumption of liability, he explained.

“It will be quite interesting to see how they implement that,” Valençon said of EU countries. “The presumption of liability will be a big shift. It could create new claims against defendants that were not exposed in this way before,” such as online marketplaces and software developers.

“It may open the door to mass claims for data breaches,” Valençon noted.

Designing coverage to guard against litigation abuse means first answering a few simple questions, according to Seach.

“What are the most important things that you want to solve for? And, how do we ensure that together we design a structure that really faces off to what you are trying to achieve?” she asked.

That’s an important first step for European risk managers with operations in the U.S. who are concerned that coverage could be exhausted by a claim in a U.S. jurisdiction where insurance limits must be disclosed to plaintiffs’ attorneys, Seach said.

In response to a risk manager’s question as to whether coverage could be bifurcated so that limits for U.S. and non-U.S. risks are separate, Seach said it can be written that way. “If you want to structure it for just U.S. exposure and have a tower for the rest of the world with a U.S. exclusion, this is possible,” she explained.

Even with such a design, however, there are no guarantees that plaintiffs’ attorneys won’t seek to have non-U.S. limits apply, Seach said. “Your intent might be clear in the policy language, but they may still want to go after it.”

What remains key however, is that risk managers and businesses uphold safety standards, be that health and safety, road safety and or products and premises. Entities that can exhibit that they uphold good standards including how they select their suppliers and ensuring that suppliers too are held to the same rigor have a better opportunity in defence versus those that do not uphold such principles and standards.

Societal attitudes are changing, and the society expects more from corporations as they expect higher degrees of rigor and safety.